How to Calculate a Car Lease Payment

While leasing is a great way to get the lowest possible monthly payment on a new car, figuring out how to determine that payment can be quite confusing.

This is primarily because, rather than being based upon how much the car is worth, it’s derived from how much the automobile will be worth. The easiest way to explain this is to take a look at how to calculate a car lease payment. 

Key Factors in Determining a Car Lease Payment

The primary factors are:

• Purchase price of the car

• Lease term in months

• Number of miles you’ll put on the car

• Residual value of the car at lease end

You’ll also need to take into consideration the amount of tax you’ll pay, the interest rate that will be applied to the deal and the down payment you’ll make. 

The Purchase Price

Even though you’re leasing, you’ll negotiate the purchase price with the seller as if you’re buying. This is because the company from which you lease the car will be purchasing it and renting it back to you.

However, you’re responsible for getting the best price you can for the car because your monthly payments will be based, in part, on how much you agree to pay for the car overall. Therefore, it’s in your best interest to conduct research to learn what similar cars typically sell for in your area. 

Down Payment

You’ll find this referred to as your capital reduction payment. Basically, it’s the amount of money you offer as sort of a security deposit to show you’re willing to put some “skin in the game” too. The purchase price — less your down payment — is reflected on a lease agreement as the capitalized cost of the car. 

Lease Term/Mileage Cap

Most leases run in the neighborhood of 36 months. Yes, it’s possible to get shorter ones — and longer ones too in some cases. The sweet spot tends to be around 36 months, because that coincides with the typical new car warranty.

Special offers often run 32 or 34 months so the car will still have some warranty left when it goes back on the market. This too, helps preserve the value of the car. 

You’ll also agree to keep the mileage at or below 1,000 miles per month for mainstream cars. Highline luxury and sports cars tend to have 10,000 mile per year mileage caps — again, to help preserve the value of the car on the secondary market. 

Generally speaking, the longer the lease term or the higher the mileage cap, the more the monthly payment will be. 

Residual Value

This is determined by estimating what the car will be worth as a used car when the lease is over. What you’re actually paying for when you lease a car is the depreciation it experiences while you’re driving it.

The value of the car after depreciation has occurred is known as the residual. Let’s say you lease a car at a purchase price of $36,000 and it’s expected to experience 50 percent depreciation over the life of your lease.

This means you’ll pay $18,000 to lease the car, plus fees, taxes and interest.

Fees, Taxes & Interest

Taxes are typically based upon the county in which you live and are looked upon as a form of sales tax. However, rather than being calculated on the entire price of the car, they’re applied to your monthly payment.

You’ll also run into acquisition fees, taxes on incentives, governmental fees and document fees. However, these are usually paid upfront — along with the first month’s payment — as “drive-off” fees.

Interest is referred to as the money factor on a lease agreement and is expressed as a fraction. To find out what interest rate is being applied to your deal, multiply the quoted money factor by 2400.

Putting It All Together

Running the numbers by hand when you’re trying to learn how to lease a car can be quite a task. Fortunately, there are a number of good lease calculators online to help you.

All you need are the values for the factors above, all of which are spelled out in the lease agreement.  However, if you’d still prefer to do it yourself, you’ll find a great example to follow at Edmunds.com. 

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